S.E.C. Real Estate Observer

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A Meeting of the Minds: A Recap

I recently attended a brainstorming roundtable session with a group of businessmen. In attendance were commercial real estate practitioners (including several SECs), a residential real estate powerbroker, a health-care professional, an IT engineer, and a builder. This was a fairly diverse group with a wide range of ages that provided for different perspectives.

The purpose of the session was to discuss the state of the economy, commercial real estate, government initiatives, macroeconomic factors at play, and health care during COVID. I think we can all agree that these are interesting times—an unprecedented commercial and residential real estate market, low interest rate environment, uncertainties regarding taxes and government policies, looming inflation, product shortages and supply chain concerns, a huge number of jobs with not enough people willing to fill them, and a pandemic that is not quite yet behind us. I thought it might be beneficial to share some of the highlights and takeaways of what we discussed.

• The housing market is on fire, and that is not projected to change for the next 2–3 years. Over the last two years, Texas has seen its median home price increase 27% to $310,000. There was a drop to 1.7 months inventory versus 3.7, and the average home is now closing above list price (100.5% close to list). I’m sure many states are witnessing similar situations.
• There are several factors driving our housing boom. (1) jobs; (2) more homebuyers—in part because of the addition of millennials coming of age who are now ready to purchase; (3) low interest rates; and (4) an influx of people relocating from other states. Now, we (or at least I) normally don’t pay much attention to housing trends, but households and jobs drive market growth and the demand for ancillary services and goods, which in turn correlates to our business.
• Despite a common belief otherwise, China is not becoming the dominant power. There were several factors given to support this opinion: (1) the United States has a working age population that is growing (whereas China’s is declining); (2) GDP in the United States is $60,000+ per capita vs. $10,400 for China; (3) US debt is 164% of GDP vs. 222% for China; (4) although the US savings rate is lower than China’s (31%), the United States has increased from 5% to 14% because of stimulus; (5) household formations are going up vs. down in China; (6) there is a 3 million unit housing shortage in the United States vs. 1.4 million empty units in China; and (7) there is uncertainty about the China Communist Party vs. the (somewhat) more certain political environment in the United States.
• Although commercial real estate feels frothy, we may not be headed for an immediate correction. There is still plenty of cash looking for deals and a limited supply of quality properties on the market. This was a clear observation from our recent meeting in Newport Beach. Multiple offer scenarios on commercial properties seem to be the norm, with many properties trading at, or in some cases above, list. Low interest rates continue to support this buying fever, which stands to last for a couple years.
• Inflation is here. Prices are rising for many goods and services, and there is no immediate relief in sight. The US inflation rate was at a 13-year high of 5.4% in September 2021. It was suggested that this number is much lower than the actual inflation. When using calculations used in 1980 (since that time, various adjustments have been made to manipulate the numbers to understate actual inflation) the real inflation rate was found to be 13.4% (source: shadowstats.com). The Fed is predicting 2.2% inflation for 2022–2023, but no one believes that number. The Fed is no longer regularly reporting M2 money supply, but it has increased from $13.1 trillion in Sept 2016 to $15.4T in Jan 2020, to $20.8T in Aug 2021. Add to that $1.5–5.0T in additional potential spending being debated in D.C. right now. The writing is on the wall when it comes to inflation.
• Although COVID is in decline, it is not going away. Cases and hospitalizations are on the decline, but we are going into the season that typically sees increases in viral infections. Booster shots are going to become the norm, much like flu shots. Vaccine mandates are segregating our society and presenting new challenges for businesses, regardless of whether you are in favor or not of the vaccines.
• We are not yet headed for another Great Recession/Depression. Although it might seem like the deck is increasingly stacked against us, a closer look at previous economic downturns suggests otherwise, at least for the near term. Previous causes of a depression were identified as follows—stock market crashes, decrease in manufacturing orders, control of prices and wages, deflation, high oil prices, loss of consumer confidence, and high inflation.

Some signs to watch for a pending recession/depression are worsening unemployment rates, rising inflation, declining property sales, and increasing credit card debt. To those concerns, here are the responses: current reported unemployment is 4.8%, and there are plenty of jobs available; inflation is rising but is not yet at truly alarming levels; property sales are near all-time highs; and credit card debt has been in steady decline since 2009. When considering the current data and comparing them to previous major downturns, it seems that we might be in the clear a little while longer. That said, we all share sentiments of something coming, but we are not sure where or when. The mantra is, “Proceed with caution, but proceed.”

Now, I feel I must provide a disclaimer that the above are personal opinions based on the available data and perceived business climate at this time. It will be interesting to look back a few years from now and see whether our projections and opinions hold true! However, one statement from our meeting really stuck with me: “Every problem creates an opportunity. The bigger the problem, the bigger the opportunity.” We, as SECs, see the world and creative real estate in a different light than most of our peers. We are experienced, successful professionals who are well equipped to see the opportunity in every potential scenario that might come our way. So, while we can’t control or fully predict what might be coming down the pike, we can control how we react and adjust to it, and we can seize the opportunities it might present!